The Rise and Fall of SunPower (SPWR)

Welcome to the 105th Pari Passu newsletter.

Today, we are back with another restructuring story: the demise of SunPower.

Founded in 1985, SunPower Corporation was a rising star in the nascent solar panel industry. With solar and storage solutions offering “customers control over electricity consumption and resiliency during power outages while providing cost savings to homeowners,” by 2020, SunPower was among the top ten solar panel providers in the United States. Yet, a faulty business model, tactical blunders, and macroeconomic headwinds made for a chronically unprofitable business.

After years of operating losses and restructuring efforts, including a spin-off of manufacturing capabilities, SunPower was forced to reckon with Chapter 11 by August 2024. The article explores how SunPower rose to the forefront of U.S. residential solar energy before its slow descent into insolvency. From a meme stock short squeeze to even the auditor throwing in the towel, the story of SunPower does not lack heat. Let’s dive in.

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The Rise of Sunpower

Founded in 1985 by Stanford Professor Richard Swanson, a pioneer in the commercialization of solar panels and namesake of “Swanson’s Law,” SunPower’s future was bright. By 1997, SunPower solar cells powered NASA's Pathfinder; by 2005, the company IPO’d under the SPWR ticker. With revenue growing at ~20% CAGR, SunPower was soon among the leading residential solar providers in the United States servicing over half a million homes across the U.S. and Canada. At its peak in 2021, SunPower was valued at over a $9bn market cap. [1] [2]

Up until 2020, SunPower boasted in-house manufacturing capability through its SunPower Technologies Segment. However, by August 2020, the segment was spun off as Maxeon Solar. Now headquartered in Singapore, Maxeon could better focus on cheaper international manufacturing options. Meanwhile, the spin-off reduced SunPower’s capital intensity, with capex run-rate drastically falling ~$100mm; FY2019 revenue was ~1.1bn and capex was $111mm. A Master Supply Agreement (MSA) preserved Maxeon panel supply for SunPower, preventing supplier disruption. The move was met with market optimism, with stock price jumping 15%. Yet, issues with Maxeon purchase obligations were yet to come, and SunPower was left solely as a downstream solar panel and energy storage contractor. [3]

Having sold their most valuable assets, SunPower’s main value-add was now as a leasing platform and project developer, generating revenue through either direct sale, leasing, or their financing platform:

1. Direct Sale: This constitutes the majority of SunPower's revenue, where they sell fully functioning solar power systems and storage solutions. The products are sold through a network of dealers and resellers as well as an internal sales team.

2. 3rd Party Leasing: Launched in 2011, SunPower’s residential lease program provides customers with SunPower systems under 20-year lease agreements including maintenance and 25-year warranty coverage. It is structured to be entered by the customer with third-party leasing partners, which are special-purpose entities SunPower neither controls nor consolidates.

3. Financing Platform: Launched in 2021, SunPower Financial is SunPower’s in-house financing company which supports direct sales with financing solutions such as loans arranged through third-party lending partners, in some cases for no money down. [4]

An important distinction to make here is that SunPower third-party developer partners not only source and sell to customers, but also purchase and own equipment from SPWR to make the sale. SPWR may provide technical sale assistance and sometimes uses an internal team as a selling channel, but SunPower does not take direct ownership of the panels and leases them out like Sunrun or Sunnova. Upon installation, SunPower’s direct economic interest is over. Direct sale is self-explanatory, and leasing agreements are sold off to special-purpose entities. Usually, ~65% of the payment to Sunpower is unlocked either when the contract is signed or upon installation, another 30% is received upon installation of solar assets, and the remaining balance is received upon connection to the grid. [25]

So, post-spin off, SunPower could effectively be viewed as a glorified solar warehouse, consultancy, and financing platform relying on third-party networks for nearly all aspects of operations. Leading up to bankruptcy, SunPower lacked both competitive edge and operating leverage, leaving them vulnerable to pricing squeezes from both the supply and demand side. From 2015-2023, SunPower on average saw annual revenues of ~$1.5bn, COGS of $1.3bn, SG&A of $277mm, and interest of ~50mm. Net income averaged -$236mm with capex averaging -$140mm. With SG&A regularly outpacing gross profit since 2015 and unfavorable unit economics — a 54% increase in sales from 2021-2022 mirrored a 63% increase in SG&A that same period — SunPower’s business has performed about as poorly as one might expect:

• SunPower has turned a positive operating profit only twice since 2014, with the slim FY2021 profit attributable to its Blue Raven acquisition. At the time of acquisition, Blue Raven was one of the fastest-growing residential solar providers in the U.S. with a geographic footprint expected to expand SunPower’s reach outside California. Moreover, even with demand acceleration in 2022 as energy prices skyrocketed over 30%—meaning SunPower could charge higher prices per watt—SunPower was barely breaking even on EBIT.

• In the past 10 years of operation, SunPower has not had a single year of positive free cash flow. Free cash flow has been almost entirely negative since 2004.

• ROIC has consistently been below WACC, and SunPower has never issued a dividend.

Long story short, SunPower’s business model has failed to create value for its shareholders.

Sacrificing profitability in the short-term may be excusable in order to capture market share. Sadly, this is not SunPower’s story. In 2013, Sunpower saw annual revenues of $2.5bn. By 2022, that had declined to $1.7bn. This represents a total decline of 31%, or approximately -3% annually, attributable to the sell-off of business segments in order to generate cash. Including Maxeon’s revenue of $1bn in FY2022—which, as a reminder, was SunPower’s divested manufacturing business—revenue would have remained largely flat at $2.7bn.

The Business Partners

Before tracing SunPower’s descent into Chapter 11, we must examine the major shareholders.

Back in June 2011, when fossil fuel companies fretted about the transition towards clean energy, French oil company TotalEnergies bought a 60% majority stake in SunPower for $1.4bn at ~46% premium through a friendly tender offer. The deal valued Sunpower’s equity at $2.3bn, Consequently, Sunpower became a majority-owned subsidiary of TotalEnergies Solar INTL SAS and TotalEnergies Gaz & Electricité Holdings SAS, both subsidiaries of TotalEnergies SE. On December 23rd, 2011, TotalEnergies entered a private placement agreement and purchased another 18.6mm shares of common stock at $8.80 per share for a total of $164mm, increasing total ownership to ~66%, with an implied valuation of Sunpower’s equity at ~$2.7bn [4]

By September 2022, TotalEnergies and TotalEnergies Gaz sold 50% less one unit of equity interests to the holding company GIP III Sol Acquisition LLC—a joint venture by TotalEnergies and Global Infrastructure Partners. Global Infrastructure Partners (GIP), is an infrastructure PE investor later acquired by BlackRock in January 2024. The transaction was structured as an exchange in private stakes, where TotalEnergies will buy a 50% stake in Clearway Energy Group (which owns 42% interest in Clearway Energy Inc) in exchange for a $1.6bn cash and 50%-minus-one-share interest in the TotalEnergies subsidiary that holds its 51% stake in SunPower, so exact valuations are not publicly known. However, we do know that by the time of bankruptcy, Total and GIP each owned approximately 25% of SunPower. [4]

Image Source: August 7th First Day Hearing Presentation [5]

Capital Structure

*The $1.53bn non-debtor funded debt obligations are linked to non-debtor SPVs associated with SunPower’s financing/loans business which also filed Chapter 11 and have been jointly consolidated for procedural purposes, but not substantively consolidated. [5][6]

Note that the debtor SunPower Corporation is the ultimate parent company of the nine other debtors in the ensuing Chapter 11 cases, along with a number of other non-debtor affiliates. [24]

Given how SunPower’s business profile does not make them an ideal lending partner, debt primarily consists of revolver and bank loans. By FY2021 end, SunPower had ~$574mm of debt and capital lease obligations, $123mm cash, and -$54mm in FCF. Annual interest 20154-2023 averaged around $50mm with EBIT of -$1390mm.

Storm Clouds: The Beginning of the End

Already a fragile and levered business reliant on government subsidies while nonetheless unprofitable, three problems arose to eclipse SunPower’s future.

1) Subsidy cuts

The solar industry is a difficult business due to crowding and slim margins, and is made attractive primarily through two policies:

1. Investment Tax Credit (ITC) financing: The federal government offers tax incentives under the Inflation Reduction Act (IRA) for renewable energy projects including ITC. ITCs are tax credits issued to certain businesses, including those building renewable infrastructure, which allows them to deduct a specified percentage of certain investment costs from their tax liability. To capitalize on the tax incentive, investors provide capital to fund renewable energy projects in exchange for the tax benefits generated from those projects. Since its inception, Sunpower has raised tax equity investment funds (a type of special purpose vehicle) for investors to participate and claim tax benefits while funding the installation of SunPower solar systems. While the policy remains, and has actually expanded credits from 26% to 30% of total project cost, it is worth noting that the primary incentive for funding solar projects is inherent to government policy, not business fundamentals. [4]

2. Net Energy Metering (NEM): Net metering is a billing mechanism that allows customers to receive credit for excess electricity they produce back to the grid. In theory, this allows homeowners to save money, as they can use credits from excess electricity generated to cover a portion of electricity bills. However, beginning in 2023, California changed the state compensation formula to NEM 3.0, which effectively reduced net metering compensation rates for new California solar customers by ~75%. New solar panel sales volumes in California declined ~80% within the first 3 months of NEM 3.0 as demand plummeted, directly hitting SunPower’s topline in 2023. [7][21]

2) Ill-timed Inventory Stockpile

In the first half of 2023, SunPower misjudged demand and drew down their credit facility to purchase a massive amount of solar panels at peak prices. The panels arrived after demand declined in Q2 2023 and panel prices dropped 30-40%. As a result, SunPower faced constrained liquidity and was now saddled with mismarked inventory that would either need to be written down, or left to balloon COGS due to FIFO accounting. The inventory blunder exacerbated SunPower’s difficulty in grappling with demand decline, and was a significant blow to liquidity [4].

This inventory surplus was likely the impetus for SunPower exiting its exclusive supply agreement with Maxeon in the second half of 2023, which had locked SunPower into a minimum volume commitment with a take-or-pay component. This agreement essentially forces SunPower to pay for a certain amount of panels each period whether or not SunPower needed it. With their inventory surplus, the last thing SunPower needed was even more panels. SunPower stopped paying Maxeon for product delivered in an effort to preserve liquidity, and the exclusive supply agreement was abruptly terminated after Maxeon’s ensuing lawsuit. Maxeon was now free from legal responsibility to preferentially deliver to SunPower. [3]

3) Higher Interest Rates

Given a significant portion of new panel installations are funded through debt due to the high installation costs averaging ~$20,000 per customer, higher interest rates starting in 2022 disincentivized consumers from solar. As per SunPower’s 10-K:

To make matters worse, higher interest rates led to higher mortgage rates, which resulted in reduced construction. Given a good portion of demand for SunPower’s premium products comes from new homes, demand further suffered from a slowdown in new-home construction. [3]

By 2023, SunPower’s topline declined 3% year-over-year, and the company faced weaker supplier relationships, a diminished cash position of only $87mm compared to $377mm the previous year, and a demand slowdown. The lag on order fulfillment meant the worst of the revenue trough was 1-3 quarters delayed, but impending.

Too Little Too Late

In the end, the combination of prolonged unprofitability and a slowdown in demand were insurmountable challenges to SunPower’s weak business model, and the company effectively began self-liquidating.

Even without factoring in the Maxeon spin-off, as early as 2021, SunPower closed their Hillsboro manufacturing facility, laying off ~170 workers and selling certain assets and liabilities to independent third parties. That same year, SunPower sold a third of its minority interest in Enphase for $178mm cash on the open market [4].

By May 2022, TotalEnergies purchased SunPower’s Commercial and Industrial Solutions business for $190mm. The segment included direct sales of turn-key engineering and sales of energy under power purchase agreements (PPAs). [8]

The restructuring process resulted in positive investing cash flows, netting out negative operating cash flows and reducing total debt from ~$900mm in 2018 to ~$300mm by December 2023. Yet in the same period, total assets nearly halved from $2.4bn to $1.3bn, and PP&E declined 80% from $932mm to $177mm. SunPower was liquidating in order to fuel core operations. [8]

As a last-ditch cost-cutting effort by year-end 2023, the company announced $100mm of potential COGS and operating expense savings from site consolidation, lower cost panels, and reduced overhead. SunPower was projecting a “37% decline in overall equipment expense,” though it was questionable who would be willing to sell discounted panels to a borderline insolvent company. Moreover, 2023 operating cash flow was -$151mm; even with cost cuts, cash flow would remain negative at -$51mm. [4][9]

A Grim Sunset: Lead-Up to Chapter 11

“Substantial doubt exists about our ability to continue as a going concern and if we are unable to continue our business, our common stock might have little or no value” (2023 10-K amendment) [4]

A disclaimer like that is never something one wants to see in the 10-K of a portfolio holding. Yet, that is exactly what SunPower investors found in their amended 2023 10-K on December 18th, 2023.

That’s right, amended.

On October 19th, 2023, SunPower declared that the 10-K and 10-Qs since the period ended January 1st, 2023 are “affected periods” and need to be restated. Issues were many, including capitalization errors, errors in inventory reconciliations, and classification of certain expenses as COGS instead of opex and as continuing operations instead of discontinued operations. The total adjustment impact on income from continuing operations before income taxes and equity in earnings of unconsolidated investees for FY2023 is a decrease of $15-25mm. [4][10]

SunPower’s faulty accounting led to a breach in a financial covenant and reporting covenant of the Credit Agreement, which allows for requisite lenders to accelerate immediate payment of $246mm and cut SunPower off from the remaining $54mm of revolving commitments. The delay in the delivery of third quarter financials also led to a breach in the Loan and Security Agreement with Atlas, which allows lenders to demand immediate payment of $65mm.

SunPower was able to obtain a waiver and additional financing through a Second Lien Credit Agreement on February 15th, 2024 from TotalEnergies and GIP. The partners issued a new $175mm term loan on 12% cash interest or 15% PIK interest, which included $45mm roll-up, $80mm of new investment, and $50mm of second tranche available under satisfaction of certain conditions. In exchange, SunPower also agreed to issue penny warrants to Sol Holding to purchase 41.8mm shares of common stock with an additional 33.4mm warrants issued if the $50mm tranche is drawn. [9][11]

It’s frankly perplexing why the Board and insiders allowed SunPower to pay such high interest for the “privilege” of 45% dilution from 75mm warrants (February 23rd market cap was $0.56bn). Perhaps the Board hoped the market would drive up the stock price so SunPower could raise more money by issuing overvalued equity to then use to cover the 2L position, then play out optionality. As for TotalEnergies and GIP, they apparently would rather sink $175mm and play optionality with penny warrants than take the $150mm write-off.

Yet, with CEO Peter Faricy resigning just two weeks later on February 26th, 2024, and a compliance warning from Nasdaq due to a delayed 10-Q filing, SunPower’s prospects were bleak. [12]

Short Squeeze

By May 2024, SunPower had 95% short interest of float—and for good reason. That high short interest, along with low float given the majority of shares are owned by Sol Holdings, made SunPower the ideal short squeeze target. On Tuesday, May 14th, SunPower stock price roared up 61.2% on heavy volume alongside several other names in the wake of the spectacular rally of GameStop and other meme stocks. [13]

Prices plummeted just as quickly as SunPower powerlessly watched, unable to issue stock at-the-market given their delayed financials.

By June 27th, even their auditor Ernst & Young called it quits after additional reporting issues in April. Commentary within the 8-K indicates internal struggle:

Lights Out: Petition

By July 17th, 2024, SunPower announced they were no longer supporting new leases or agreements—in other words, no longer acquiring new customers. The company also released a letter to its third-party dealer network stating that they could not support the installation of panels that had been delivered but not yet installed. As SunPower approached bankruptcy, only $32.6mm cash remained in debtor and non-debtor bank accounts. Recall the company was burdened with ~$480mm in debtor-funded obligations and $1.5bn in non-debtor funded obligations. [20]

After a long struggle with liquidation and cost-cutting, auditors and covenants, waivers, and bridge financing, SunPower filed for Chapter 11 on August 5th, 2024 in the District of Delaware under Judge Goldblatt. [15][16]

Source: August 7th First Day Hearing Presentation [5]

SunPower was delisted from the Nasdaq on August 16th, 2024. [17]

The End: Chapter 11 Liquidation

“I’m 76 years old and the world left a crying CEO-less baby on my doorstep.” — TJ Rodgers, CEO of Complete Solaria, chair of SunPower from 2005 to 2011 [2]

Competitors moved in fast.

The very day following the petition, Sunrun, a downstream solar panel contractor and market leader in third-party owned U.S residential solar, hired two industry veterans from SunPower, and the Sunrun share price jumped 10%. While Sunrun revenues also experienced a dip as energy prices normalized and NEM 3.0 took effect, their business model primarily operates through PPAs—where Sunrun effectively retains ownership of the solar panels installed on a homeowner’s roof and sells the electricity back to the customer at fixed rates—thus smoothing some volatility and diversifying revenue streams. [18]

Moelis began sourcing buyers for SunPower's direct-to-consumer Blue Raven business as early as July 29th, and found a stalking horse in Complete Solaria who purchased the New Homes (segment focusing on new home installations), Blue Raven, and Dealer Network assets for $45mm cash and assumed $51mm in liabilities. Complete Solaria is a small California-based residential solar provider that went public via SPAC in 2023. The stalking horse was approved on August 29th, and on September 16th, Complete Solaria’s stalking horse bid was declared the winner. These assets represent nearly SunPower’s entire operating business—approximately 98% of go-forward operating assets and 67% of the total expected value of SunPower’s assets. Complete Solaria retained approximately 90% of SunPower’s workforce and assumed 88% of executory contracts, which means that Complete Solaria will now be the fulfilling party of SunPower’s remaining service contracts. [5][19][BBG Terminal]

WIth the majority of SunPower acquired as a going concern, the goal was now to maximize value in liquidating the remaining assets. Legacy projects “Coburn” and “Raven” were sold to Frontier Investment Partners (an energy investment firm founded as a JV to Fortress), and interests in certain non-debtor subsidiary entities and certain related assets were sold to HA SunStrong Capital LLC and GF SunStrong Capital, LLC (non-debtor subsidiaries of SunPower). Some solar loans and membership interests were sold from a non-debtor subsidiary to GoodFinch SPV WL IV for $11.9mm in order to fund the case. [5][24]

In addition to the loan sale, debtors relied on $18.2mm of prepetition cash collateral to fund Chapter 11, as prepetition lenders and third parties were understandably unwilling to provide DIP financing to a liquidating company. Consequently, SunPower’s Chapter 11 spanned only three months, with some asset sales streamlined through a Section 363 process.

On September 6th, debtors filed the first draft of the disclosure statement, which the U.S. Trustee objected to on the basis of third party releases, a measure that would protect non-debtor parties such as corporate officers from future legal claims such as securities class action for advertising flawed product. The Trustee argued that deeming creditors as consenting to third-party releases if they did not affirmatively opt-out on a form was an unfair way to extract approval. After investigation from a special committee, the third party releases were approved in a supplement filed October 3rd. [25]

A revised POR and disclosure statement was filed September 19th, which detailed how assets were to be wound-down and sold, with the option of establishing a creditor trust to streamline the waterfall of value down the cap structure. There wasn’t much to go around, with value breaking at the first lien which received recoveries of ~8% under the POR. This was double the projected 4% recovery from a Chapter 7 liquidation process which would have incurred further costs and delays (see Appendix). The First Lien Secured Claims include a $200mm revolver and $100mm TL facility, which are secured on a first-priority basis on substantially all of SunPower’s assets. The Second Lien Secured Claims consists also of a term loan secured on a second lien basis on substantially all of SunPower’s assets. [25]

Source: Pari Passu, Exhibit C of Disclosure Statement (Docket 515) [24]

Classes 3, 4, and 5 were entitled to vote, and the POR was unanimously accepted by the four First Lien holders which represent all $295mm of Class 3 claims. The one Class 4 holder of $186mm rejected the plan, but they were crammed down upon. Equity holders were wiped. Confirmation was on October 18th, 2024, and the Plan went effective November 14th, 2024.

Conclusion

Accounting issues, last-ditch financing, and the meme stock frenzy led up to a rather tumultuous end for SunPower. With SunPower’s petition closely following the June bankruptcy of competitor iSun, the case demonstrates both the sensitivity and fragility of the residential solar industry.

Appendix

Liquidation Analysis

*Analysis assumes conversion to Chapter 7 on October 18th with $13mm cash on hand,

~$400,000-$500,000 remaining A/R collections and $1.6-$2.4mm remaining inventory collections, and failure of backlog sales and Joint Venture asset sales. Projects Chapter 7 Trustee fees of 3.0% of gross liquidation proceeds, and assumes Chapter 7 to span 9 months. [25]

* $11mm of net estimated proceeds from liquidation available for distribution divided by $295mm of 1L claims = 0.037 which is ~4%

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